Which of the following events would strengthen the argument for the use of monetary policy and...

Which of the following events would strengthen the argument for the use of monetary policy and weaken the argument for the use of fiscal policy?

I. Investment spending becomes more sensitive to changes in interest rates.

II. A balanced budget amendment is passed and made effective.

III. International trade and financial flows become a more important part of the U.S. economy.

A I only

B II only

C I and II only

D II and III only

E I, II, III

Solutions

Expert Solution

Answer-(A) I only.

Monetary policy refers to the policies regarding growth of money supply,availability of credit and interest rates of credit or cost of credit.It is exercised by the central bank which acts on the behalf of the central government to control inflation and achieve many other desired economic objectives.

Fiscal policy refers to the policies of the government regarding its revenue and expenditure.A budget is a detailed annual financial statement of the government that shows the sources and amount of income accruing to any government and where and how these funds are to be used.

Here the answer would be Only (A) because the statement I talks about the investment and interest.This includes the quantity of money and its availability in the economy,its demand and supply which determines the rate of interest.These all concepts directly comes under the purview of monetary policy and is controlled by the central bank.The statement II talks about budget which directly deals with the revenue and expenditure,thus it comes under the purview of fiscal policy of the central govt.And all the options other than (A) includes the second statement which directly comes under fiscal policy.So only the option (A) seems to strengthening the argument of using monetary policy than fiscal.

The third statement talks about international trade and financial flows.This seems to be a bit difficult in classifying them as monetary or fiscal policy.They mainly constitutes the Aggregate Demand(AD).If AD is boosted the level of economic activity will rise up,national income would increase and due to this the govt. would get more options of collecting more taxes which costitutes to be the part of revenue of the government.Thus this also seems to be tilting towards the fiscal policy only.

Rahul Sunny answered 1 year ago

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